This demand system for differentiated products

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: and system for differentiated products follows from solving the optimization problem of a representative passenger with a quasi-linear utility function a la Dixit (1979); it reflects that composite products are substitutes for one another and products are less differentiated as d tends to b. Marginal costs per passenger are assumed zero. Economides and Salop (1992) illustrate their results on complementary goods with the above linear demand system. We begin by characterizing the pre-alliance solution. Airlines choose simultaneously and non-cooperatively their respective profit-maximizing fares. The profit functions are 1 = p1 Q12 , 2 = p2 Q12 , 3 = p3 Q34 , and 4 = p4 Q34 . Superscript na denotes the no-alliances scenario. The equilibrium prices are 5 Note that, in the European Economic Area, the proportion of monopoly routes account for about 75%. 6 given by, pna = pna = 1 2 3b + 2d ; 9b2 - 4d2 pna = pna = 3 4 3b + 2d 9b2 - 4d2 Equilibrium travel volumes, profits and consumer surplus are the following, Qna = 12 na na 1 = 2 = b (3b + 2d) = bpna ; 1 9b2 - 4d2 Qna = 34 b (3b + 2d) = pna 3 9b2 - 4d2 b (3b + 2d)2 b (3b + 2d)2 na na = b (pna )2 ; 3 = 4 = = b (pna )2 1 3 2 - 4d2 )2 2 - 4d2 )2 (9b (9b CS na = b[(9b2 + 4d2 )(2 + 2 ) + 24bd] 2 (9b2 - 4d2 )2 2.1 Alliance equilibriu...
View Full Document

This note was uploaded on 05/12/2010 for the course MAN 6721 taught by Professor Kraft during the Spring '10 term at University of Florida.

Ask a homework question - tutors are online